For most of its history, the financial system has been defined by centralized institutions. Banks and governments control the movement of money, lending, and payment settlement. The financial system’s heavy reliance on intermediaries to create and verify trust in these transactions leads to slower and more expensive settlement for cross-border transactions, which can take days in some cases.

 

In 2009, Bitcoin was created by an enigmatic inventor called Satoshi Nakamoto in the wake of the global financial crisis. Bitcoin was not simply another digital currency but a new way to think about money that relied on blockchain technology and decentralized consensus. Bitcoin was not just another form of money; it handed control over money (and money movements) in a digital sense from institutional entities to individuals and decentralized networks.

The Financial Landscape Before Bitcoin

Prior to Bitcoin, the financial world was constrained by centralized authorities (both monetary, like a central bank, and commercial) which governed the issuance, circulation and regulation of currency. While these institutions safeguarded stability, they also necessitated intermediaries (e.g., payment processors and clearning houses) for virtually all transactions. Trust was extended to these third-parties to guard against fraud, maintain records and settle accounts; however, their authorization created significant friction.  

Fees were often astronomical, especially with international transfers. Even in local transactional activity, merchants reported multiple banks applying percetage fees along the payment journey (i.e., to their acquiring aggregate banks).  

 

Access to financial services was limited for billions of the unbanked and underbanked (especially in nonurban and developing areas where financial institutions typically have not established an outpost/infrastructure). Global payments often took days to settle (i.e., due to regulatory checks against the transaction, time zones, bureaucracy, etc.).

 

Transactions lacked transparency; account holders (the transacting parties) had little to no knowledge about what was being appraised in their transaction data or with their funds, which had led to abuses as in the crisis during 2008. The institutional standard for transacting seemed to assist many, but excluded much of the population and limited innovative solutions to a few entities while focusing on maintaining control in the monetary sphere and maximizing profit for these organizations.

Core Innovation of Bitcoin: Decentralization

Fundamentally, Bitcoin has changed finance in one simple way: decentralization. Bitcoin allows for peer-to-peer transfer of value without relying on banks or other intermediary third parties. Rather than trusting one specific entity as the source for truth and transaction verification, Bitcoin relies on a network of distributed computers (known as nodes) to collectively be the source of truth through a public ledger (the blockchain). The blockchain is a public record of all transactions and is secured through cryptography and structured in a way that certain transactions cannot be modified. 

 

Trust is achieved through consensus mechanisms such as proof-of-work, which require miners to race to complete complex mathematical problems to validate "blocks" of transactions. Once the block is added to the blockchain, that block and its transactions are final and could not be altered without opponent consent from the majority of the network. The trust due to the ledger being entirely visible and public, also skips over the types of third-party oversight that traditional systems prescribe.

 

Users can validate the entire history of transactions if they have an Internet connection (e.g. anyone can see how much Bitcoin they have in their wallet), which quickly convinced many stakeholders to trust Bitcoin. The invention of Bitcoin democratically organized finance: Users can send value around the world in under 10 minutes, without traditional third-party oversight, when it was previously the opposite.

Bitcoin as Sound Money

Bitcoin is often referred to as "sound money" because there is a fixed supply of 21 million coins; in contrast, fiat currencies have an unlimited supply which unlimited supply a central bank can create, causing inflation. This limited supply is hardcoded in Bitcoin's protocol, similar to precious metals like gold but in a digital form. Historically, as demand has grown, limited supplies in a deflationary environment have resulted in the potential increase of value in a unit of currency, which leads to Bitcoin holders saving rather than spending.

 

The narrative promotes Bitcoin as a long-term store of value, or "digital gold," as a currency that preserves purchasing power against diluting the value of money in currency systems that undergo excessive printing. Countries that have dealt with inflation, such as Venezuela or Zimbabwe, have seen that Bitcoin can function in place of a currency that is losing purchasing power.

 

Bitcoin ensures the thinking and actions of citizens are financially responsible, as well, it also acts as an economic hedge. It means that increasing monetary supply no longer has to be a central bank's necessary policy, and they may reintroduce scarcity, both principles that many consider to be the foundations of the healthiest economies.

Global Implications & Adoption

The ramifications of Bitcoin go beyond one person to another and are contributing to the disruption of finance across the globe with its application to cross-border remittances or financial inclusion. In areas with unreliable banking infrastructure, like parts of Africa and Latin America, Bitcoin can allow people to receive money from overseas more quickly and at a lower cost than remittance services like Western Union, thereby assisting migrant workers and their families to keep more of their money that can often be bled into fees. 

 

In countries with hyperinflation or capital controls, such as Argentina or Lebanon, Bitcoin functions as a safe haven against the devaluation of local currency and gives rights to citizens to maintain their savings as borderless versus the local currency. These rights have led to increased usage of Bitcoin with companies like MicroStrategy and Tesla having incorporated Bitcoin as part of their treasuries as a reserve.

 

Additionally, Bitcoin has inspired financial innovation, such as decentralized finance (DeFi), markets where borrowing and lending can function without banks. By 2025, a learned prediction, millions of individuals will utilize Bitcoin on a daily basis as evidence that Bitcoin has provided a pathway to democratizing wealth tools to the general population that can now rival the monopoly of established financial systems.

Challenges & Criticisms

Regardless of its potential to revolutionize, there are many obstacles to Bitcoin that some regulators and skeptics have found problematic. Some of the most prevalent are volatility, both in terms of price and everyday transactions - store owners are unlikely to accept a payment when they have no idea what price they are receiving for it, which can be caused by dramatic price drops and rises. Additionally, speed and scalability have also been an issue for Bitcoin; when the transactions exceeded the available processing power, it created backlogs and fees went up dramatically, as Bitcoin allows miners to charge fees for processing your transaction during peak use.  

 

On the regulatory front, the concerns continue to grow as governments worldwide are working to understand the impact of Bitcoin on monetary policy and tax law. Some of the most heated debates go beyond taxes and the underground economy, to the energy use of the proof-of-work mining protocols, which some have equated to entire countries worth of energy in terms of electricity consumption.

 

In some regards, the financial industry has already adapted, as many have already developed both central bank digital currencies (CBDCs), to get some decentralized benefits while maintaining centralized control, and stablecoins, a variation of crypto that is pegged to a currency, to mitigate the price volatility. 

All in all, these developments serve to highlight the ways in which Bitcoin has impacted legacy systems and pushed them towards adaptation, even though Bitcoin itself continues to receive significant scrutiny.

Conclusion

There is no doubt that Bitcoin has changed the financial system, creating a decentralized, scarce, and transparent system that eliminates the need for intermediaries and empowers individuals around the world. From supporting faster remittances to providing a hedge against inflation, its innovations continue to permeate everything from our personal finances to institutional frameworks.

 

As the world evolves with new technologies, such as CBDCs and DeFi, Bitcoin’s mark as the impetus for change remains and has serious implications. The first step in understanding what Bitcoin means for finance is understanding its impact; whether you are an investor, a policy maker, or simply use personal finances, evaluating this change may help you navigate the digital economy and its opportunities better.

 

This article is contributed by an external writer: Donald Benedict.

 
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